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Dunedin hit by volatility

By James Thorneley Dunedin Smaller Companies trust performance has been adversely affected by short ...

By James Thorneley

Dunedin Smaller Companies trust performance has been adversely affected by short term volatility, although its low risk strategy has protected it somewhat from the downturn in the markets.

Over one, three and five-year periods the trust's NAV has outperformed the FTSE SmallCap index, but over three months it has fallen short of beating its benchmark.

Its diversified portfolio has limited the downside affect of the correction in tech stocks, but the trust has still suffered from the recent re-balancing of the indices.

During the five years to 9 June the trust's NAV rose by 87% compared to a rise in the FTSE SmallCap index of 76%. Yet over three months, the NAV fell by 17% while the index fell by 6%.

Many of the trust's larger holdings, including BTG, Sherwood International, Anite and Axon all enjoyed recent promotion into the FTSE 250 but have remained in the portfolio.

Their subsequent performance was disappointing, according to Andy Bamford manager of the £75m trust. He said: "These companies were essential holdings when they were in the Small cap arena because of their size. When they entered the mid-250 index they were relatively small constituents and managers did not have to hold them."

The investment strategy used on Dunedin is quite different to that used on Edinburgh Smaller Companies investment trust, managed by Alistair Currie, according to Bamford. While Dunedin can invest in companies with market caps of up to £450m, Currie's trust is restricted to companies with market caps of below £150m. In addition, Bamford said Edinburgh Smaller Companies took more aggressive positions with some individual holdings having 4-5% weightings.

He added: "The Dunedin trust is for the more risk averse investor who expects consistent outperformance while the Edinburgh trust is suited to investors who want to take more of a risk in the smaller companies sector."

The shares of Dunedin currently trade on a discount of 28.2%, one of the widest discounts in the UK smaller companies sector.

According to Bamford part of the reason for this is that investors have invested in trusts which have significantly outperformed over the past three years due to large exposure to technology, media and telecom companies.

Apart from the discount on the shares another attractive constituent of the trust's equity is the yield it offers. The 2.8% is over twice the average yield of the smaller companies sub-sector.

Martin Fothergill, investment trust analyst at Deutsche Bank, said: "Although the relative performance has suffered due to the index constituent changes, the portfolio is still one of the most balanced, low-risk and well diversified in its sub-sector. With a discount of 28.2% the trust is the most attractively priced within the UK smaller company sector."

Another positive will be the continuing corporate activity in the sector. At least one portfolio holding is in talks and Bamford is confident that corporate activity will be an increasingly important factor of portfolio performance over the forthcoming months.